A Path To Economic Crisis
by Alex Saitta
June 27, 2005
Paul Volcker was the chairman of the Federal Reserve from 1979 to 1987. Warren Buffett is one of the richest men in the world and has made his fortune investing in the financial markets. Both are worried about the high debt level in this country and its rapid rate of growth, and they think an economic crisis is likely.
After reading those articles, I did some quick calculations.
The federal debt is about $7.9 trillion. There are about 110 million households in the U.S., so on average each household owes about $72,000 each. SC state government has also borrowed about $11 billion in our name. Spread over the the 1.6 million households in the state, and that adds about $6,800 to the total. My estimate is Pickens County has borrowed and added about $1,500 in debt per house hold in this county. In total, federal, state and local general obligation debt falling on each household in Pickens County is about $80,000. (Update: that didn't include the $11,000 per household the majority on the Pickens County School Board added 6 months after this write-up.)
When we pay taxes, all we are doing is paying interest on that debt. The principal is not being paid down at all. Actually, the principal or the amount each household owes is growing about $4,100 a year.
If your neighbor next door had such a debt, and was continuing to borrow more and only make the interest payments, you'd think they were in a bad situation.
This USís present financial condition is bad, but the future looks worse. Soon the people of this country will be strapped with the tab for many of these big social programs that have just gone into the red or will soon go into the red. Private pensions too, like the $6.4 billion in pension obligations United Airlines just dumped on the people of this country. Likely, the US goverment will borrow for all those obligations in our names as well.
That $80,000 burden doesn't include what you have borrowed in your name. The average household now holds about $20,000 in consumer debt (auto loans, credit cards, etc). The average household holds $100,000 in mortgage debt. That sums to about $200,000 in debt per household.
And that isnít all the private and public debt. Some have estimated it to be as much at $40 trillion or a bit less than $400,000 per household. Either way our debt levels are high and growing rapidly.
What are US leaders doing about it? Given the lack of movement in Washington on such issues as Social Security issue, I now agree with Paul Volcker and Warren Buffett. It is no longer a question of ďifĒ, but a question of ďwhenĒ the economic crisis will occur.
Social Security will go in the red in 2017, and then the US's borrowing needs will rise even more. That's will stack more debt on an already debt laden America.
Anyone that looks at figures and population demographics can see programs like Social Security and Medicare are in big trouble. Yet, nothing is being done in Washington. If Washington can't solve or ease the Social Security problem, while Bush is in his last term, and Republicans control Congress, surely nothing will get done in the first term of the next president to fix the problem. This makes it likely the the debt time bomb Volcker and Buffett speak of will blow.
Iíve read a lot about this the last few months. Others are saying the same thing (a crisis is coming) and are explaining why (too much debt). I only found one market analyst willing to predict when. He pointed to 2016. Again, that is a throw of a dart. It could happen tomorrow, 5, 10 or 20 years from now.
I could not find one analyst, economist or investor who described in a step by step fashion how the crisis might unfold. Volcker talks about a falling dollar and rising interest rates. Reading between the lines, you can uncover what else he is thinking. US citizens spend most of their income, borrow to spend even more and save very little. The US can't balance its savings with all its private and public borrowing. On the world stage, the US is a net borrower. The lenders come from abroad.
For example, foreign investors now hold 53% of US Treasury debt. Of all US Treasury borrowing, half is loaned to the Treasury by US citizens/ entities and half is loaned by foreign citizens/ entities. If foreign investors lose confidence in the US, the economy or the USís ability to pay the interest on their loans, those foreign investors will sell those Treasury bonds. This will cause two things, the dollar will fall and US interest rates will rise or what Volcker speaks of.
How The Crisis Could Unfold:
Given US citizens have so little in savings, they are in no position to step up and buy those bonds. Those bonds, once held by foreigners, will fall in price until they find a buyer from somewhere, pushing interest rates higher along the way. Simultaneously the dollar will fall as foreign investors bail out of US Treasuries and into the assets of other countries.
The rising rates will then cause company earnings to fall and therefore stock prices, and the rising rates also will hurt real estate (both homes and land). Precious metals are probably the only investment that will go up.
The US is at the mercy of foreign investors, just like it is at the mercy of OPEC. The US doesnít have enough domestic oil, so it has to pay the price OPEC wants. The US doesnít have enough domestic savings to fund all the public and private borrowing that goes on in this country, so the US has to borrow from abroad. If foreign investors decide to stop or slow their lending to the US, the US will have to pay foreigners the interest rates they demand.
There is nothing one person can do to solve the problem. My advice is to focus on what you can do to minimize the effect on you and your family. My opinion, for what it is worth, is pay off your house and make sure one of your cars is paid off. Hopefully, the doo-doo won't hit the fan for years, so you'll have time. When it does, though, you don't want a lein against the roof over your head, and at least one of your cars. In such a crisis, economic activity will fall, jobs will be lost and incomes will drop, so it may be difficult to make payments on the assets you borrowed against.
This Is One Reason Why I'm So Fiscally Conservative:
By the way, all this public debt is one of the reasons why Iím a fiscal conservative. Given government at the federal, state and local levels owe so much money, government should be the last resort when it comes to financing. Certain things must be funded by government, like defense, highways and schools. Other non-essential items shouldnít be. Government or we the people are already in too much debt.
When I say I donít want to fund this or that with government money, most of the time Iím thinking, that money should be used to pay off some of the staggering government debt. When I say I want to limit additional government borrowing, it is because the government (we the people) owe too much already.
Moderates and liberals say I donít act in the best interest of our children. I think just the opposite. Iím acting in the best interest of our children, and they arenít. I ask, who is going to have to make the interest payments on all this government debt? Our children. Who is going to have to pay it off? Our children, if not, their children.
Weíve allowed our government to borrow $80,000 per household, a debt our children will inherit when they become adults. My daugther Scarlett is 3. At the rate we are going, by the time she enters the workforce, the government debt per household will probably be two or three times what it is now.
We Are To Blame:
When this economic crisis hits, naturally, weíll blame our leaders for borrowing all that money in our name. We the people will be to blame too, for insisting on all these government services and for doing all this consuming and doing a lot of it on credit. Not doubt, our leaders will deserve some of the blame for not taking the time to understand the problem, nor having the courage to tell the people the path we are heading down.